Cash Management Secrets From a Former Berkshire Hathaway CFO

Organizations don’t run themselves. People do. Business leaders know that. So, why do so many leaders lean into the misconception that cash manages itself?

Every exceptional business leader is a cash manager.

Cash management isn’t just for accountants or finance teams. It’s for all business leaders. That’s because the true function of cash management is to direct it toward its highest and best use.

As I’ve shared in previous articles, after you’ve established a clear destination, provided a roadmap to get there, and put the right people in the right roles with the right responsibility and authority across your organization, it’s time to turn your attention to cash management.

It might feel like a departure from the human side of scaling, but it’s not, because cash management is all about people. As a former Berkshire Hathaway CFO, I’ve learned from experience that leaders can use cash flow, forecasting and allocation to grow the value of a business through any inflection point.

Think of cash flow as a river, not a lake

Most leaders view cash as a reservoir – a resource that flows in to a basin and gathers. They see cash management as protective, believing its purpose is to be preserved, saved and slowly used.

That’s the wrong way to view your cash.

Successful leaders see cash flow as multiple streams of income harnessed into one strategic focus and then funneled out to create more income streams. To effectively manage cash, leaders must know two things – where it is coming from (cash sources) and where it is going (cash uses).

We are used to thinking about time this way. Manufacturing plants, distribution centers and even doctors’ offices manage every minute, looking for ways to create or accomplish more with less. Managing cash requires a similar mindset.

Instead of stockpiling cash, use it to infuse your current and future cash flows. Turn today’s tributaries into tomorrow’s rushing rivers. Never forget that cash flows where people direct it. When you have cash flowing to every area of growth across your organization, you can build momentum, leading to more opportunities for growth and bottom line results.

Forecasting is the foundation of strong cash management

The value of your business has nothing to do with what you’ve done in the past. It has everything to do with what your future cash flows look like. Investors know this. Historical financial statements are important for proving credibility and to a small extent, validating the quality of your forecast; but the only thing that matters to investors, banks and buyers, and the only thing that should matter to you is your future cash flows.

Use 13-week and 12-month cash flow forecasts to guide your cash management activity

A 13-week cash flow forecast is a highly interactive and informative tool. You can use it to get all your leaders on the same page financially and ensure you’re directing your cash to its best and highest purpose.

Your finance leader should develop one using inputs from Sales and Operations and update it weekly. When complete, it tells you exactly what to expect from a cash flow perspective week by week for the next 13 weeks.

At a higher level, use a rolling 12-month cash flow forecast to how much cash you will generate that can be re-invested, or when your business will need capital. This allows a business to line up sources of capital well before the need arises.

If all you’re using now is a 12-month forecast, your cash management procedures are inadequate. Taken together, these two forecasting tools provide the weekly and monthly updates and yearly perspective to effectively use your cash to fuel business growth.

When it comes to allocation, follow the cash

Knowing your burn rate is an important first step in cash allocation. Every manager and leader should know their burn rate – the amount of cash consumed in a given period, usually a month. Your burn rate tells you the minimum amount of cash you must have to keep your business moving forward.

This is distinct from the amount of cash you personally feel comfortable having on hand. That can vary from three to six months or more, depending on the nature of your business and how frequently you are able to bring in new cash.

Some things stop your cash flow – a customer may go bankrupt; supply chain stoppage may keep you from shipping; a few major customers may call and say they have to pay you late. Yet your payroll costs continue. When business interruptions keep you from collecting revenue, it’s critical to know exactly how long you have until you have burned through your current cash supply.

If one of your best customers calls and says they are going to be 60 days late, and you know your burn rate is three months, you can accept their terms and deepen the relationship.

Eliminate, simplify, standardize

As you analyze your cash allocation and optimize your cash flow, it’s critical to know what levers you can pull to lower the amount of cash you’re burning if your inflows slow down.

Payroll hourly wages may be one of the easiest levers to adjust, but be very careful about any permanent roles you eliminate to increase your cash supply. Don’t forget the cost of re-hiring the roles; you will have to recruit, train and onboard new hires.  

Likewise, be very mindful of key dependencies that have been built around people on your payroll who have the knowledge that everyone else is leaning on to operate effectively. Remove them and you’ve cut your legs out from beneath you.

Other expenses you can adjust to control cash flow include discretionary spending such as overtime and travel, and anything you’re paying a premium for, such as consulting or software development. If you’re spending $300,000 on product or software development, cut it back by 30% and defer it for three to five months while you navigate a slower period of cash inflow.

Let the reality that every cost can go away guide your analysis. Balance that with retaining key functions and expertise to achieve an ideal balance. Don’t be afraid to look at fractional staffing as well. While you may have to scale back from a full-time CFO, for instance, you could hire a fractional CFO to lead your organization until you resume an operating level that calls for a full-time team member.

Remember that while elimination and deferment is the fastest way to reduce your cash burn, simplifying overcomplicated processes can also be effective. Once simplified, it is easier for you to automate, outsource, or fractionalize a function. These moves will help you lower your ongoing cash burn level.

As you manage your cash, don’t forget to manage your balance sheet

If managing cash is one side of a coin, managing working capital is the other. To their detriment, many business leaders overlook the active management of their balance sheet. It’s always better to have more working capital, since a stronger position equates to flexibility and a better credit profile since you are effectively managing the capital you already have.

Analyzing your accounts receivable and analyzing everything you bill to customers is one example. Changing your terms from net 45 to net 30 could create a new source of cash that you can use to finance activities you would have otherwise had to request from a bank.

Likewise, increase the velocity of your inventory by refining safety stock requirements, reducing lead times and negotiating purchase terms, freeing up additional cash that you can then direct toward its best and highest purpose.

Invest your time to build trusted relationships

Before I leave the topic of cash management, there are a few final areas to cover – starting with banking and treasury management. Make sure you have at least two banks holding your deposits. As we saw with Silicon Valley Bank, there’s always a risk with putting all your eggs in one financial basket.

If you have debt, formalize what is required of your business. Understand and monitor the covenants covering your debt. Make sure you have a clearly articulated plan for remaining compliant. The last thing a CFO wants is to have a lender call a debt because a covenant was violated – especially over something as careless as an error or omission.

Missteps can result in less desirable terms on future loans or a loss of credibility, which could hinder your flexibility in the future.

Finally, examine your relationships with capital sources and advisors, ensuring you have multiple, trusted relationships in those areas. Be upfront, transparent and proactive. If you’re not spending time with your investors and banking partners at least 5-6 times a year, you’re not talking to them often enough.

You want your lending partners to know you well. If you know a forecast is going to be off due to a vendor changing terms, tell your partners that upfront. Your transparency will build trust, increasing their comfort level in lending to you. 

The bottom line

Every inflection point requires financial leaders who understand that relationships are at the heart of great cash management. With 13-week and 12-month forecasting procedures, fully-optimized cash allocation, and open, transparent relationships with capital sources in place, you’re ready for the next priority during an inflection point – establishing scalable infrastructure.

Need help navigating your inflection point? Let's chat about how the 100 Day Playbook can help provide clarity for your business.